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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________.
NYMEX HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 333-30332 13-4098266
(STATE OR OTHER JURISDICTION (COMMISSION (I.R.S. EMPLOYER
OF INCORPORATION OR FILE NUMBER) IDENTIFICATION NUMBER)
ORGANIZATION)
ONE NORTH END AVENUE, WORLD FINANCIAL CENTER, NEW YORK, NEW YORK 10282-1101
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(ZIP CODE)
(212) 299-2000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
As of August 13, 2001, 816 shares of the Registrant's common stock, par
value $0.01 per share, were outstanding. As described in this report, the
Registrant and its wholly owned subsidiary, New York Mercantile Exchange, Inc.,
succeeded to the business and operations of the New York Mercantile Exchange
upon consummation of a demutualization that took place on November 17, 2000.
None of the stock of the Registrant is listed for trading on any stock exchange
or included in any automated quotation system. New York Mercantile Exchange,
Inc. has 816 Class A memberships outstanding, representing trading privileges.
The sole Class B membership represents an economic interest in New York
Mercantile Exchange, Inc., which is held by the Registrant.
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TABLE OF CONTENTS
PAGE
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PART I: FINANCIAL INFORMATION
Item 1. Financial Statements........................................ 3
Unaudited Condensed Consolidated Statements of Operations
and Accumulated
Deficit/Members' Equity for the Three Months and Six
Months Ended June 30, 2001 and June 30, 2000........... 3
Unaudited Condensed Consolidated Balance Sheets at June
30, 2001 and December 31, 2000......................... 4
Unaudited Condensed Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 2001 and June 30,
2000................................................... 5
Notes to Unaudited Condensed Consolidated Financial
Statements for the Three and Six Months Ended June 30,
2001 and June 30, 2000................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 12
Item 3. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 20
PART II: OTHER INFORMATION
Item 1. Legal Proceedings........................................... 22
Item 2. Changes in Securities and Use of Proceeds................... 22
Item 3. Defaults Upon Senior Securities............................. 22
Item 4. Submission of Matters to a Vote of Security Holders......... 22
Item 5. Other Information........................................... 22
Item 6. Exhibits and Reports on Form 8-K............................ 22
Signatures........................................................... 23
PRELIMINARY STATEMENT: A registration statement on Form S-4 with respect
to the Registrant's common stock, was declared effective on May 12, 2000. On
November 17, 2000, the New York Mercantile Exchange converted from a New York
not-for-profit membership association to a Delaware for-profit non-stock
corporation and became the subsidiary of the Registrant, a Delaware for-profit
stock corporation. On April 24, 2001, the Registrant filed a Form 8-A and
registered its 816 shares of common stock under the Securities Exchange Act of
1934, as amended.
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3
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NYMEX HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND ACCUMULATED DEFICIT/MEMBERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS FOR 2001 AND
PER NYMEX DIVISION MEMBERSHIP AMOUNTS FOR 2000)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -----------------
2001 2000 2001 2000
-------- -------- ------- -------
Operating Revenues:
Clearing and transaction fees, net of member fee
rebates............................................ $26,478 $22,692 $50,218 $47,840
Market data fees...................................... 8,003 8,713 16,266 17,051
Other, net of rebates................................. 1,325 1,020 2,927 2,171
------- ------- ------- -------
Total operating revenues...................... 35,806 32,425 69,411 67,062
------- ------- ------- -------
Operating Expenses:
Salaries and employee benefits........................ 15,675 11,729 27,365 23,338
Rent and facility..................................... 4,097 3,839 8,183 7,496
Depreciation and amortization of property and
equipment,
net of deferred credit amortization................ 3,881 3,382 7,702 6,604
General and administrative............................ 3,395 3,972 7,644 7,764
Telecommunications, equipment rentals and
maintenance........................................ 3,392 3,282 7,335 6,710
Professional services................................. 2,443 4,286 6,548 8,270
Impairment loss on capitalized software............... 1,605 -- 1,605 --
Amortization of goodwill.............................. 539 539 1,077 1,077
Marketing............................................. 563 740 999 1,235
Loss on disposition of property and equipment......... -- 296 24 296
Demutualization expense............................... -- 3,379 -- 3,715
Other................................................. 1,381 1,002 3,176 1,981
------- ------- ------- -------
Total operating expenses...................... 36,971 36,446 71,658 68,486
------- ------- ------- -------
Loss from Operations.................................... (1,165) (4,021) (2,247) (1,424)
Other Income (Expenses):
Investment income, net................................ 1,184 2,045 2,909 4,328
Interest expense...................................... (1,929) (1,934) (3,857) (3,862)
------- ------- ------- -------
Loss before benefit for income taxes.................... (1,910) (3,910) (3,195) (958)
Benefit for income taxes................................ 778 1,940 1,234 523
------- ------- ------- -------
Net loss................................................ (1,132) (1,970) (1,961) (435)
Accumulated deficit/members' equity, beginning of
period................................................ (585) 93,993 244 93,202
Less net transfer to members' retention program:
NYMEX Division........................................ -- (335) -- (825)
COMEX Division........................................ -- (103) -- (357)
------- ------- ------- -------
Accumulated deficit/members' equity, end of period...... $(1,717) $91,585 $(1,717) $91,585
======= ======= ======= =======
Net loss per share/per NYMEX Division membership (based
on 816 shares/NYMEX Division memberships)............. $(1,387) $(2,414) $(2,403) $ (533)
======= ======= ======= =======
The accompanying notes are an integral part of these statements.
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NYMEX HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
AT JUNE 30, 2001 AND DECEMBER 31, 2000
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
JUNE 30, DECEMBER 31,
2001 2000(1)
-------- ------------
ASSETS
Cash and cash equivalents................................... $ 17,351 $ 32,979
Marketable securities, at market (cost of $58,404 at June
30, 2001 and $75,637 at December 31, 2000)................ 60,229 77,628
Clearing and market data fees receivable.................... 12,272 11,614
Prepaid taxes and expenses.................................. 6,583 4,468
Other current assets........................................ 4,575 4,477
-------- --------
Total current assets.............................. 101,010 131,166
Property and equipment, net................................. 225,896 224,547
Goodwill, net............................................... 17,405 18,482
Other assets................................................ 12,880 12,943
-------- --------
Total Assets...................................... $357,191 $387,138
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
NYMEX Division members' retention program................... $ -- $ 33,221
Accounts payable and accrued liabilities.................... 13,620 11,285
Accrued salaries and related liabilities.................... 7,239 3,869
Notes payable............................................... 2,815 2,815
Deferred credit -- grant for building construction.......... 2,145 2,145
Accrued interest payable.................................... 1,920 1,920
Other current liabilities................................... 1,979 1,019
-------- --------
Total current liabilities......................... 29,718 56,274
Notes payable............................................... 97,185 97,185
Deferred credit -- grant for building construction.......... 117,962 119,035
Other non-current liabilities............................... 20,153 20,772
Subordinated commitment -- members' retention program....... 9,475 9,213
-------- --------
Total liabilities................................. 274,493 302,479
COMMITMENTS AND CONTINGENCIES (See Note 8)
STOCKHOLDERS' EQUITY:
Common stock, at $0.01 par value, 816 shares authorized,
issued and outstanding.................................... -- --
Additional paid-in capital.................................. 84,415 84,415
(Accumulated deficit) Retained earnings..................... (1,717) 244
-------- --------
Total stockholders' equity........................ 82,698 84,659
-------- --------
Total Liabilities and Stockholders' Equity........ $357,191 $387,138
======== ========
---------------
(1) The amounts as of December 31, 2000 have been derived from the audited
consolidated financial statements of NYMEX Holdings, Inc. and subsidiaries.
The accompanying notes are an integral part of these statements.
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NYMEX HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30,
------------------
2001 2000
------- --------
Cash Flows From Operating Activities:
Net loss.................................................. $(1,961) $ (435)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization of property and
equipment, net of deferred credit amortization........ 7,702 6,604
Amortization of goodwill............................... 1,077 1,077
Deferred income taxes.................................. (735) (276)
Loss on disposition of property, equipment and
impairment of capitalized software.................... 1,629 296
Net changes in operating assets and liabilities........ 21,571 (10,030)
------- --------
Net cash provided by (used in) by operating
activities....................................... 29,283 (2,764)
------- --------
Cash Flows From Investing Activities:
Capital expenditures...................................... (11,753) (5,780)
Decrease in other assets.................................. 63 313
------- --------
Net cash used in investing activities............. (11,690) (5,467)
------- --------
Cash Flows From Financing Activities:
Distributions under NYMEX Division members' retention
program................................................ (33,221) (556)
------- --------
Cash used in financing activities................. (33,221) (556)
------- --------
Net Decrease in Cash and Cash Equivalents................... (15,628) (8,787)
Cash and Cash Equivalents, Beginning of Year................ 32,979 36,592
------- --------
Cash and Cash Equivalents, End of Period.................... $17,351 $ 27,805
======= ========
Supplemental Information:
Cash paid for:
Interest............................................... $ 3,840 $ 3,846
======= ========
Income taxes........................................... $ -- $ --
======= ========
Non-cash members' equity transaction -- transfer to
subordinated commitment -- members' retention program:
NYMEX Division......................................... $ -- $ 825
======= ========
COMEX Division......................................... $ -- $ 357
======= ========
The accompanying notes are an integral part of these statements.
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NYMEX HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED
JUNE 30, 2001 AND JUNE 30, 2000
1. DESCRIPTION OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business -- NYMEX Holdings, Inc. ("NYMEX Holdings") was
incorporated in 2000 as a Delaware for-profit corporation, and is the successor
to the New York Mercantile Exchange, which was first established as the Butter
and Cheese Exchange in 1872. The two principal operating subsidiaries of NYMEX
Holdings are New York Mercantile Exchange, Inc. ("NYMEX Exchange" or "NYMEX
Division") and Commodity Exchange, Inc. ("COMEX" or "COMEX Division"), which is
organized as a wholly-owned subsidiary of NYMEX Exchange. Where appropriate,
each operating division, NYMEX Division and COMEX Division, will be discussed
separately, and collectively will be referred to as the "Exchange." When
discussing NYMEX Holdings together with its subsidiaries, reference is being
made to the "Company."
Basis of Presentation -- The accompanying unaudited condensed consolidated
financial statements of NYMEX Holdings, Inc. and its subsidiaries have been
prepared in accordance with Accounting Principles Board Opinion No. 28 and Rule
10-01 of Regulation S-X promulgated by the Securities and Exchange Commission
(the "SEC"). These are unaudited condensed consolidated financial statements and
do not include all necessary disclosures required for complete financial
statements.
In the opinion of the Company's management, the accompanying unaudited
condensed consolidated financial statements reflect all adjustments, consisting
only of normal recurring adjustments, necessary to present fairly the Company's
financial position, results of operations and cash flows for the dates and
interim periods covered. Interim period operating results may not be indicative
of the operating results for a full year. This information should be read in
conjunction with the audited consolidated financial statements and notes thereto
as of December 31, 2000 and 1999 and for each year in the three-year period
ended December 31, 2000.
The preparation of the accompanying condensed consolidated financial
statements and related notes in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements, the reported amounts of revenues and
expenses during the reporting period, and the disclosure of contingent
liabilities. Actual results could differ from those estimates.
Certain reclassifications have been made to the prior year amounts to
conform to the current presentation. All intercompany balances and transactions
have been eliminated in consolidation.
Prior to its demutualization, the New York Mercantile Exchange accounted
for the contributions to the NYMEX and COMEX Divisions' members' retention
programs as transfers from members' equity to subordinated commitments. Since
demutualization, such contributions and related earnings are accounted for as
expenses; retroactive application has not been adopted.
During the fourth quarter of 2000, the Company changed the estimated useful
life for an internally developed software project from five years to three
years. This change in estimate was based on management's belief that this
software had a shorter useful life due to rapidly changing technology. At that
time, the Company did not consider this change in estimate to be material to the
annual financial statements, and as such, did not effect prior year
comparability and was not reported in the Company's annual report. Management
believes this change in estimate has a material effect on the three and six
month periods ending June 30, 2001. The effect of this change in estimate for
the three and six month periods presented was to increase the pre-tax net loss
by approximately $385,000 and $770,000, respectively or $474 and $944 per share,
respectively.
The decrease in the Company's effective tax rate for the three and six
month periods ended June 30, 2001, as compared to the three and six month
periods ended June 30, 2000, is due to the Company's higher proportion of
non-taxable earnings relative to pre-tax loss.
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The Company is exploring the potential tax benefit, if any, of the
termination distribution of $33,221,000 from the NYMEX Division Members'
Retention and Retirement Plan.
For a summary of significant accounting policies (which have not
significantly changed from December 31, 2000, except for the NYMEX Division and
COMEX Division members' retention program funding -- see note 2 to the unaudited
condensed consolidated financial statements) and additional information, see
note 1 to the audited December 31, 2000, financial statements which were filed
with the SEC on the Company's Form 10-K, dated March 29, 2001.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for
Derivative Instruments and Hedging Activities, which was later amended by SFAS
No. 138. Among other provisions, it requires that entities recognize all
derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. Gains and losses resulting from changes in the
fair values of those derivatives would be accounted for depending on the use of
the derivative and whether it qualifies for hedge accounting treatment. The
effective date of this standard was delayed via the issuance of SFAS No. 137.
The effective date of SFAS No. 133 is now for fiscal years beginning after June
15, 2000, though earlier adoption is encouraged and retroactive application is
prohibited. Effective January 1, 2001, the Company adopted this statement. Upon
adoption, SFAS No. 133 had no impact on the Company's financial position or
results of operations.
In September 2000, the FASB issued SFAS No. 140, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities -- a
Replacement of FASB Statement No. 125, which revises standards of accounting for
securitizations and other transfers of financial assets and collateral. The
provisions of SFAS No. 140 carry over most of the guidance outlined in SFAS No.
125 and further establish accounting and reporting standards with a
financial-components approach that focuses on control. Under this approach,
financial assets or liabilities are recognized when control is established and
derecognized when control has been surrendered or the liability has been
extinguished. In addition, specific implementation guidelines have been
established to further distinguish transfers of financial assets that are sales
from transfers that are secured borrowings. SFAS No. 140 is effective
prospectively for transfers occurring after March 31, 2001 and for disclosures
relating to securitization transactions and collateral for fiscal years ended
after December 15, 2000. The Company adopted the provisions of SFAS No. 140 that
relate to disclosures of securitization transactions and collateral in the
preparation of its condensed consolidated financial statements for the quarter
ended March 31, 2001. The Company adopted the remaining provisions of SFAS No.
140 as required, during the second quarter of 2001. The adoption of the
remaining provisions had no impact on the Company's financial position or
results of operations.
In June 2001, FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets, which supercedes APB Opinion No. 17, Intangible Assets. This statement,
effective for fiscal years beginning after December 15, 2001, addresses, among
other things, how goodwill and other intangible assets should be accounted for
after they have been initially recognized in the financial statements. The
provisions of SFAS No. 142 provide for an impairment test to be performed at
least annually rather than recording monthly amortization. The Company believes
that the adoption of SFAS No. 142 will have a material effect on operations. If
the Company had adopted this standard during the second quarter of 2001, the net
loss would have decreased by $538,000 or $659 per share. The Company believes
that the adoption of this standard may increase annual pre-tax net income by
$2,152,000 or $2,637 per share, which is the amount of annual amortization of
goodwill.
3. COLLATERALIZATION
At June 30, 2001 and December 31, 2000, the Company accepted collateral in
the form of United States treasury bills that it is permitted by contract or
industry practice to sell or repledge, although it is not the Company's policy
to sell or repledge collateral. This collateral was received in connection with
reverse repurchase agreements and is held in custody by its banks. The fair
value of such collateral at June 30, 2001 and December 31, 2000 was $13,300,599
and $30,108,800 respectively.
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4. REVENUE REBATE AND FEE REDUCTION PROGRAM
Effective January 1, 1996, the Company adopted a fee rebate program, which
substantially reduces clearing and transaction fees for NYMEX Division members.
The Board of Directors approved a 50% reduction in the rebate rate, effective
January 1, 2001. Rebates under this program totaled $1.9 million and $3.3
million for the three months ended June 30, 2001 and June 30, 2000,
respectively, and $3.4 million and $6.6 million for the six months ended June
30, 2001 and June 30, 2000, respectively. Clearing and transaction fees are
presented in the unaudited condensed consolidated statements of operations and
accumulated deficit/members' equity, net of these rebates.
The Company also adopted several incentive programs for members for the
purpose of reducing various operating costs such as telephone, rent and
marketing expenses. These incentive programs totaled $515,000 and $846,000 for
the three months ended June 30, 2001 and June 30, 2000, respectively, and $1.0
million and $1.3 million for the six months ended June 30, 2001 and June 30,
2000. Other revenues are presented in the unaudited condensed consolidated
statements of operations and accumulated deficit/members' equity net of fee
reductions related to these programs.
5. SEGREGATED FUNDS
The Company is required under the Commodity Exchange Act to segregate cash
and securities that are deposited by clearing members at banks approved by the
Company as margin for house and customer accounts. These assets belong to the
clearing member firms and are not included in the accompanying unaudited
condensed consolidated financial statements. At June 30, 2001 and June 30, 2000,
$3,263,643 and $30,656 of cash, $4,136,989,000 and $4,496,895,300 of U.S.
Treasury obligations, and $18,000,000 and $16,970,000 of U.S. Treasury
obligations purchased under agreements to resell, respectively, were segregated
pursuant to such regulations by the NYMEX Division. In addition, $201,000,000
representing shares of certain money market mutual funds were also held by the
NYMEX Division and segregated on behalf of the clearing members at June 30,
2001. No such deposits were held at the end of prior periods, as such assets
were not acceptable forms of margin until June 1, 2001. In addition, at June 30,
2001 and June 30, 2000, the NYMEX Division held irrevocable letters of credit
amounting to $92,156,400 and $248,650,000, respectively, which are used by
clearing members to meet their obligations to the Company for margin
requirements on both open futures and options positions, as well as to meet
delivery obligations, in lieu of depositing cash and/or securities. The Company
invests cash deposits and earns interest thereon. All interest earned on
deposits of U.S. government securities accrue to the clearing member firms
depositing such securities.
At June 30, 2001 and June 30, 2000, the segregated funds of the COMEX
Division consisted of $224 and $2,946,768 in cash, $560,270,000 and $682,340,500
in U.S. Treasury obligations, and $5,810,000 and $3,930,000 of U.S. Treasury
obligations purchased under agreements to resell, respectively. The COMEX
Division also held irrevocable letters of credit aggregating $48,000,000 and
$61,800,000 as of June 30, 2001 and June 30, 2000, respectively.
6. GUARANTY FUND
Each clearing member firm is required to maintain a security deposit, in
the form of cash or U.S. Treasury securities, ranging from $100,000 to
$2,000,000, depending upon such clearing member firm's reported regulatory
capital, in a fund known as a "Guaranty Fund" for the respective clearing
division (NYMEX Division and/or COMEX Division). Separate and distinct Guaranty
Funds, held by the Company, are maintained for the NYMEX and COMEX Divisions.
These funds may be used by the Company for any loss sustained by the Company as
a result of the failure of a clearing member firm to discharge its obligations.
At June 30, 2001 and June 30, 2000, the total deposits maintained in the
NYMEX Division Guaranty Fund were $79,486,000 and $81,601,000, respectively. At
June 30, 2001 and June 30, 2000, the total deposits managed by the COMEX
Clearing Association for the COMEX Division Guaranty Fund were $77,930,000 and
$76,080,900, respectively.
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7. SEGMENT REPORTING
During the second quarter of 2001, the Company changed its structure of
internal reporting which caused the composition of reportable segments to
change. The Company considers operating results for three business segments:
open-outcry, enymex(SM) and NYMEX ACCESS(R).
Open-outcry is the trading of NYMEX Division and COMEX Division futures and
options on the trading floor of the Exchange. enymex(SM), while not yet
operational, will be an internet-based, global exchange trading and clearing
contracts in a range of commodities with an initial focus on energy and metals.
NYMEX ACCESS(R) is an electronic trading system which currently permits the
trading of futures and options contracts on crude oil, heating oil, unleaded
gasoline, natural gas, electricity, and platinum, and futures contracts on gold,
silver, copper, aluminum, propane and palladium.
Prior year's financial information relating to these new business segments
is set forth below, as required by SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information.
NYMEX
OPEN-OUTCRY ENYMEX(SM) ACCESS(R) TOTAL
(In thousands) ----------------- ----------------- ----------------- -----------------
3 MOS. 6 MOS. 3 MOS. 6 MOS. 3 MOS. 6 MOS. 3 MOS. 6 MOS.
------- ------- ------- ------- ------- ------- ------- -------
Three and Six Months Ended
June 30, 2001:
Clearing and transaction
fees, net of member fee
rebates.................. $24,285 $46,293 $ -- $ -- $ 2,193 $ 3,925 $26,478 $50,218
Other operating revenue.... 9,328 19,193 -- -- -- -- 9,328 19,193
Total operating revenue.... 33,613 65,486 -- -- 2,193 3,925 35,806 69,411
Operating expenses......... 31,529 59,285 2,762 7,104 2,680 5,269 36,971 71,658
Operating income (loss).... 2,084 6,201 (2,762) (7,104) (487) (1,344) (1,165) (2,247)
Investment income.......... 1,184 2,909 -- -- -- -- 1,184 2,909
Interest expense........... 1,929 3,857 -- -- -- -- 1,929 3,857
Depreciation and
amortization............. 4,420 8,779 -- -- -- -- 4,420 8,779
Income tax expense
(benefit)................ 477 2,028 (1,067) (2,742) (188) (520) (778) (1,234)
Net income (loss).......... 862 3,225 (1,695) (4,362) (299) (824) (1,132) (1,961)
Three and Six Months Ended
June 30, 2000:
Clearing and transaction
fees, net of member fee
rebates.................. $21,428 $44,838 $ -- $ -- $ 1,264 $ 3,002 $22,692 $47,840
Other operating revenue.... 9,733 19,222 -- -- -- -- 9,733 19,222
Total operating revenue.... 31,161 64,060 -- -- 1,264 3,002 32,425 67,062
Operating expenses......... 31,555 60,791 1,449 1,449 3,442 6,246 36,446 68,486
Operating (loss) income.... (394) 3,269 (1,449) (1,449) (2,178) (3,244) (4,021) (1,424)
Investment income.......... 2,045 4,328 -- -- -- -- 2,045 4,328
Interest expense........... 1,934 3,862 -- -- -- -- 1,934 3,862
Depreciation and
amortization............. 3,921 7,681 -- -- -- -- 3,921 7,681
Income tax expense
(benefit)................ 40 2,039 (791) (791) (1,189) (1,771) (1,940) (523)
Net (loss) income.......... (323) 1,696 (658) (658) (989) (1,473) (1,970) (435)
8. COMMITMENTS AND CONTINGENCIES
From time to time, the Company is involved in legal proceedings and
litigation arising in the ordinary course of business. Set forth below are
descriptions of legal proceedings and litigation to which the Company is a party
as of June 30, 2001. Although there can be no assurance as to the ultimate
outcome, the Company believes that it has a meritorious defense and will deny
liability in all significant cases pending against it, including the matters
described below, and intends to defend vigorously each such case. While the
ultimate result of the proceedings against the Company cannot be predicted with
certainty, it is the opinion of management, after consultation with outside
legal counsel, that the resolution of these matters, in excess of amounts
already recognized, will not have a material adverse effect on the Company's
consolidated financial position, results of operations or cash flows.
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10
The Company has been named as a defendant in the following legal actions:
- Electronic Trading Systems Corporation v. New York Mercantile
Exchange. This action is pending in the United States District Court for
the Southern District of New York. NYMEX Exchange was served with a
summons and complaint on or about May 10, 1999. This is a patent
infringement case alleging that NYMEX Exchange is infringing this patent
through the use of its electronic trading system. Plaintiff seeks an
unspecified amount of royalties. On September 15, 2000, the Court granted
NYMEX Exchange's motion to sever and transfer venue from the United
States District Court for the Northern District of Texas to the Southern
District of New York. The case is in discovery.
- Enrique Rivera and Edith Rivera v. New York Mercantile Exchange, Mark
Kessloff, Les Faison, Brian Bartichek and John Does "1-10." This action
is pending in New York State Supreme Court (Bronx County). NYMEX Exchange
was served with the summons and complaint on or about April 22, 1999.
This is an ethnic discrimination case. Plaintiff alleges that throughout
his employment with NYMEX Exchange he was subjected to a hostile work
environment and discrimination regarding his ethnic origin. Plaintiff
seeks an unspecified amount of compensatory and punitive damages. The
case is in discovery. On March 28, 2001, NYMEX Exchange filed a motion to
strike the complaint. The motion is pending.
- Western Capital Design, LLC On Its Own Behalf and on behalf of those
similarly situated v. New York Mercantile Exchange and John Does
"1-50." This action is pending in United States District Court for the
Southern District of New York. NYMEX Exchange was served with the summons
and complaint on or about February 17, 1999. This action relates to
alleged wrongful conduct by NYMEX Exchange and certain members regarding
the execution of heating oil and natural gas options. Plaintiff seeks
compensatory damages and $75,000,000 in punitive damages. This action was
commenced in State Court in Florida. It was removed to Federal Court by
notice of removal filed March 8, 1999. Venue was then transferred to the
Southern District of New York by an order dated May 11, 1999. NYMEX
Exchange's motion to dismiss was filed on November 12, 1999 and granted
on March 31, 2000. NYMEX Exchange was served with an amended complaint on
or about April 26, 2000. NYMEX Exchange's motion to dismiss the amended
complaint was granted and the complaint was dismissed with prejudice on
February 16, 2001. On or about March 26, 2001, a Notice of Appeal was
served on NYMEX Exchange. The court has set an appeal schedule.
- Luxembourg Henry and Jose Terrero v. NY Mercantile Exchange. On January
24, 2001, NYMEX Exchange was served with a summons and complaint filed by
two former employees who were terminated as part of the 10%
reduction-in-workforce that occurred in July 2000. Plaintiffs allege
harassment and discrimination because of race (Henry) and national origin
(Terrero). Henry seeks reinstatement, compensatory damages in the amount
of $9,320,000 for lost wages, fringe benefits and emotional distress and
costs and disbursements. Terrero seeks reinstatement, compensatory
damages in the amount of $4,500,000 for lost wages, fringe benefits and
emotional distress and costs and disbursements. On March 30, 2001, the
parties entered into a stipulation to discontinue the action and if the
action was re-commenced, it would be brought in New York State Supreme
Court (New York County). On June 14, 2001, the action was re-commenced in
New York County. The complaint asserted additional city, state and
federal claims. Additionally, the Plaintiffs alleges damages of
$5,000,000 for each of the eleven claims. NYMEX Exchange served and filed
its answer on June 29, 2001. Subsequently, the Exchange served and filed
an amended verified answer and counterclaim (against Henry) on July 18,
2001. The case is in discovery.
- New York Mercantile Exchange v. GlobalView Software, Inc. On April 27,
2001, NYMEX Exchange filed a breach of contract suit in New York State
Supreme Court (New York County). NYMEX Exchange seeks to recover direct
and consequential damages resulting from GlobalView's breach of its
contract with NYMEX Exchange regarding the front-end development for
enymex(SM). On or about June 18, 2001, GlobalView served its answer and
asserted counterclaims in which it seeks to recover amounts in excess of
$26,000,000 for alleged fees due and owing under the contract, as well as
consequential damages and other causes of action. On June 28, 2001, NYMEX
Exchange served an
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amended complaint on GlobalView. On about July 24, 2001, GlobalView filed
a motion to dismiss one cause of action in the amended complaint.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND STATISTICAL
DATA)
INTRODUCTION
This discussion summarizes the significant factors affecting the results of
operations and financial condition of the Company during the three and six
months ended June 30, 2001. This discussion is provided to increase the
understanding of, and should be read in conjunction with, the unaudited
condensed consolidated financial statements, accompanying notes and tables
included in this quarterly report.
FORWARD LOOKING AND CAUTIONARY STATEMENTS AND FACTORS THAT MAY AFFECT FUTURE
RESULTS
The SEC encourages companies to disclose forward-looking information so
that investors can better understand a company's future prospects and make
informed investment decisions. Except for the historical information and
discussions contained herein, statements contained in this Form 10-Q may
constitute "forward looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. The Company has tried, wherever
possible, to identify such statements by using words such as "anticipate,"
"believes," "expects" and words and terms of similar substance in connection
with any discussion of future operating or financial performance. These
statements involve a number of risks, uncertainties and other factors that may
cause actual results to differ materially, including: the Company's ability to
continue to develop and market new innovative products and services and to keep
pace with technological change; failure to continue to develop and market a new
electronic trading system; the failure to obtain or protect intellectual
property rights; competitive pressures; financial condition or results of
operations; quarterly fluctuations in revenues and volatility of commodity
prices; changes in financial or business conditions; the ability to attract and
retain key personnel; ability to successfully manage acquisitions and alliances;
and legal, regulatory, and economic changes and other risks, uncertainties and
factors discussed elsewhere in this Form 10-Q, in the Company's other filings
with the SEC, or in materials incorporated therein by reference.
OVERVIEW
NYMEX Exchange's predecessor, the New York Mercantile Exchange, was
established in 1872. The Exchange exists principally to provide for the buying
and selling of commodities for future delivery under rules intended to protect
the interests of all market participants. The Exchange itself does not own any
commodities, trade futures and options contracts for its own account or
otherwise engage in market activities. The Exchange provides the physical
facilities necessary to conduct an open-outcry auction market and electronic
trading systems and systems for the matching and clearing of all trades executed
on the Exchange. Futures and options markets facilitate price discovery and
provide financial risk management instruments to a broad array of market
participants including commercial entities that produce, consume, trade or have
other interests in underlying commodities.
CORPORATE REORGANIZATION -- THE DEMUTUALIZATION
The New York Mercantile Exchange demutualized on November 17, 2000, at
which time the book value of the assets and liabilities of the New York
Mercantile Exchange carried over to NYMEX Exchange. Upon consummation of the
demutualization transaction, all the assets and liabilities of NYMEX Exchange
were consolidated into the parent company, NYMEX Holdings. NYMEX Holdings has
the right to pay dividends.
FOR THE THREE MONTHS ENDED JUNE 30, 2001 AND JUNE 30, 2000
RESULTS OF OPERATIONS
The Company reported a net loss of $1,132, which was a loss of $1,387 per
share. The net loss was $838 less when compared to the second quarter of 2000.
The primary reasons for this decrease in the net loss were the Board-approved
50% reduction in the membership clearing fee rebate rate, and a moderate
increase in trading volume for open-outcry and a significant increase in trading
volume on NYMEX ACCESS(R). These
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second quarter gains were offset by the costs associated with a reduction in
work force plan which was implemented during June 2001.
The following components of net loss make up the major changes occurring
during the second quarter of 2001.
Revenues
Total operating revenues were $35,806 in the second quarter of 2001, up
$3,381, or 10%, from the same period in 2000.
Clearing and transaction fees represent the core business of the Company
and are directly affected by volume. Changes in volume are affected by various
external factors such as:
- shifts in supply and demand as well as volatility in price levels of the
underlying commodities;
- market perception of stability in the commodities and financial markets;
- the level and volatility of interest rates and inflation;
- national and international economic and political conditions; and
- weather conditions affecting certain energy commodities.
In the second quarter of 2001, clearing and transaction fees, net of member
fee rebates, were $26,478 compared to $22,692 earned during the same quarter
last year. This 17% increase was the result of the following two conditions: (1)
a reduction in the NYMEX Division's membership clearing fee rebate rate and (2)
a moderate increase in trading volume for open-outcry and a significant increase
in trading volume on NYMEX ACCESS(R) for both the NYMEX and COMEX Divisions.
The NYMEX Division's clearing and transaction fee revenues, net of member
fee rebates, were $21,021 in the second quarter of 2001, up 19% from the
comparable period in 2000. Forty-two percent of this increase was the result of
the reduction in the membership clearing and transaction fee rebate rate. In
addition to the rebate rate reduction, NYMEX Division open-outcry volume
experienced a moderate increase. Trading volume in the unleaded gasoline
contracts rose 18% compared with the second quarter of 2000 as a result of
significant price volatility in the underlying commodity. Refinery problems and
unscheduled maintenance shutdowns caused inventory supply concerns. Crude oil
trading volume also increased, rising 15% during the second quarter of 2001 when
compared with the same quarter a year ago. Continued published reports of
fluctuations in crude oil inventories contributed to price volatility. Natural
gas trading volume decreased by 14% during the second quarter of 2001 when
compared with the same quarter a year ago. A slowdown in the domestic economy,
as well as structurally higher natural gas prices, were factors which led to
this decrease.
Trading on NYMEX ACCESS(R), which is billed at a higher rate than
open-outcry, significantly increased on the NYMEX Division during the second
quarter of 2001 when compared with the same quarter a year ago. Strong trading
led by crude oil contributed to a $915 increase in clearing and transaction fee
revenue during this period. Improvements in systems functionality helped to
increase the utilization of NYMEX ACCESS(R).
The COMEX Division's clearing and transaction fee revenues were $5,456 in
the second quarter of 2001, up 9.2% from the comparable period in 2000. Trading
volume significantly increased for both gold and copper contracts, while
decreasing for silver. Significant price volatility and the renewed strength of
the U.S. dollar against the Euro as well as the Japanese yen helped to increase
gold trading volume by 12%. Copper trading volume also increased by 15%, driven
primarily by the home construction industry. Silver trading volume decreased by
23% during the second quarter of 2001 when compared with the same quarter a year
ago. Lackluster demand reduced the price of silver as well. Low volatility in
the underlying commodity as well as a narrow price trading range also caused
trading volume to decrease.
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Market data fees, which represent 22% of the Company's total operating
revenues for the second quarter of 2001, decreased by $710, or 8% during the
second quarter of 2001 when compared with the same quarter a year ago. Total
subscriber units declined from the same quarter a year ago principally due to
contraction in the financial services industry and the bankruptcy filing of a
major market data vendor.
Operating Expenses
Total operating expenses were $36,971 during the second quarter of 2001, up
1% from the comparable period in 2000. A major portion of the $525 increase from
the same period in 2000 was the result of the implementation of the Company's
reduction in work force plan during June 2001. The increase in costs from this
event was offset by a significant decrease in professional fees, primarily as a
result of the reduced consulting work being performed on NYMEX ACCESS(R).
Salaries and employee benefits, which constitute 42% of total operating
expenses for the second quarter of 2001, rose 34% from the similar period a year
ago, primarily as the result of severance costs associated with the
reduction-in-workforce plan. This plan, which resulted in the elimination of 20%
of the Company's staff, encompassed various professional and clerical positions
throughout the Company. The total cost of the program was $4,500 of which $3,140
was paid by the end of the second quarter 2001. The remaining $1,360 unpaid
balance was included in accrued salaries and related liabilities on the balance
sheet at June 30, 2001. The program is expected to save $9,400 annually in
salaries and benefits. Savings in salaries resulting from the August 2000
reduction-in-workforce helped to reduce the impact of the recent plan
implementation.
Rent and facility fees increased by $258, or 7%, during the second quarter
of 2001 compared to the same period in 2000. A 25% increase in real estate taxes
due to reduced abatements was one of the primary factors for this increase.
Light, heat, and power costs also rose during the second quarter of 2001,
increasing by 21% when compared with the same quarter a year ago. This trend is
expected to continue during the third quarter of 2001, as utility rates remain
substantially higher than last year's rates.
Depreciation and amortization of property and equipment, net of deferred
credit amortization, increased by $499, or 15% in the second quarter of 2001
when compared to the same quarter in 2000. This increase, which is expected to
continue during the third quarter of 2001, is primarily the result of
management's decision to reduce the estimated useful life of an internally
developed software project from five years to three years during the fourth
quarter of 2000. This change in estimate is based on management's belief that
this software has a shorter useful life due to rapidly changing technology.
General and administrative expenses were down $577 during the second
quarter of 2001, a 15% decrease from the same period in 2000. Reductions in
spending, particularly in staff travel and office supplies, which were
implemented to improve profitability, were the major factors contributing to
this decrease during the second quarter of 2001.
Professional services decreased by $1,843 or 43% during the second quarter
of 2001, over the same quarter a year ago. Costs related to debugging and system
programming changes on NYMEX ACCESS(R) occurred throughout 2000, but were
substantially completed by the first quarter of 2001. These cost savings are
expected to continue throughout the rest of the year.
Impairment loss of $1,605 occurred during the second quarter of 2001 as a
result of an alleged breach of contract by a vendor that was producing the
customer interface to the enymex(SM) system which resulted in the abandonment of
that application.
Demutualization expenses incurred during the six months ended June 30, 2000
totaled $3,715, or 5% of the total operating expenses in 2000; such expenses did
not occur in 2001. These fees consisted of accounting, investment banking,
legal, printing and SEC filing fees.
Other expenses increased by $379, or 38%, during the second quarter of 2001
when compared with the same period a year ago. This is primarily the result of
the change in accounting presentation for the funding of, and earnings on, the
COMEX members' retention and retirement program. Prior to the demutualization in
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November 2000, all earnings and contributions to this plan were presented as a
transfer from members' equity. This increase is expected to continue during the
third quarter of 2001.
The decrease in the Company's effective tax rate for the three month period
ended June 30, 2001, as compared to the three month period ended June 30, 2000,
is due to the Company's higher proportion of non-taxable earnings relative to
pre-tax loss.
The Company is exploring the potential tax benefit, if any, of the
termination distribution of $33,221 from the NYMEX Division Members' Retention
and Retirement Plan.
Other Income
Investment income, net of investment advisory fees, decreased by $861, or
42% during the second quarter of 2001 when compared to the same quarter in 2000.
The liquidation and distribution of funds from the NYMEX Division members'
retention and retirement plan during the end of January of this year was the
primary reason for the decrease in investment income. A 200 basis point decline
in the average interest rates on reverse repurchase agreements also contributed
to this decrease. This trend is expected to continue in the third quarter as
interest rates are considerably lower this year as compared with last year.
FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND JUNE 30, 2000
RESULTS OF OPERATIONS
The Company reported a net loss of $1,961, which was a loss of $2,403 per
share. The net loss was $1,526 higher than the similar period a year ago. The
primary reasons for this increase in the net loss was a reduction-in-workforce
plan costing $4,500, which was implemented during the second week of June. This
decrease was offset by a significant increase in clearing and transaction fees
as a result of the board-approved 50% reduction in the membership clearing and
transaction fee rebate rate.
The following components of net loss make up the major changes occurring
for the six months ended June 30, 2001.
Revenues
Total operating revenues were $69,411 for the six months ended June 30,
2001, up $2,349, or 4%, from the same period in 2000.
For the six months ended June 30, 2001, clearing and transaction fees net
of member fee rebates were $50,218 compared to $47,840 in the same period last
year. This 5% increase was the result of the following two conditions: (1) a
reduction in the NYMEX Division's membership clearing fee rebate rate and (2) a
substantial increase in trading volume on NYMEX ACCESS(R) for the NYMEX
Division.
The NYMEX Division's clearing and transaction fee revenues net of member
fee rebates were $39,588 in the first half of 2001, up 7% from the comparable
period in 2000. A significant part of this increase was the result of the
reduction in the membership clearing and transaction fee rebate rate. In
addition to the rebate rate reduction, NYMEX ACCESS(R) volume experienced a
substantial increase. Despite a nominal 1% decrease in open-outcry volume during
the first six months ended June 30, 2001 when compared with the same period a
year ago, several significant changes did occur in NYMEX Division contracts.
Trading volume in the unleaded gasoline contracts rose 8% compared with the
first six months of 2000 as a result of significant price volatility in the
underlying commodity. Refinery problems and unscheduled maintenance shutdowns
caused inventory supply concerns. Crude oil trading volume also increased,
rising 5% during the first six months of 2001 when compared with the same period
a year ago. Continued published reports of fluctuations in crude oil inventories
caused significant price volatility. Natural gas trading volume decreased by 17%
during the first six months of 2001 when compared with the same period a year
ago. A slowdown in the domestic economy as well as structurally higher natural
gas prices were significant factors that led to this decrease.
Trading on NYMEX ACCESS(R), which is billed at a higher rate than
open-outcry, significantly increased on the NYMEX Division during the first six
months of 2001 when compared with the same period a year ago.
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Strong trading on this electronic trading system led by crude oil contributed to
a $1,000 increase during this period. Improvements in systems functionality also
helped to increase the utilization of NYMEX ACCESS(R).
The COMEX Division's clearing and transaction fee revenues were $10,630 in
the first half of 2001, representing a decrease of 2% from the comparable period
in 2000. Trading volume decreased in two of the COMEX Division's major
contracts, gold and silver, while copper's volume increased. Significant
decrease in price volatility as a result of an economic slowdown in the Middle
East and Asia curbed demand for gold, contributing to the 4% decline in trading
volume. Silver trading volume decreased by 28% during the first half of 2001
when compared with the same period a year ago. Low volatility in the underlying
commodity as well as a narrow price trading range caused trading volume to
decrease. Copper trading volume increased by 10%, driven primarily by the home
construction industry.
Market data fees, which represent 23% of the Company's total operating
revenues for the first six months of 2001, decreased by $785, or 5%, compared to
the same period last year. Total subscriber units declined from a year ago,
principally due to contraction in the financial services industry and the
bankruptcy filing of a major market data vendor.
Operating Expenses
Total operating expenses were $71,658 during the first half of 2001, up 5%
from the comparable period in 2000. A significant portion of the $3,172 increase
from the year-ago period was primarily a result of the implementation of the
Company's reduction in work force plan during June 2001.
Salaries and employee benefits, which constitute 38% of total year to date
2001 operating expenses, rose 17% from the similar period a year ago, primarily
the result of the reduction-in-work force plan. This plan, which resulted in the
elimination of 20% of the Company's staff, encompassed various professional and
clerical positions throughout the company. The total cost of the program was
$4,500 of which $3,140 was paid by the end of the second quarter 2001. The
remaining $1,360 unpaid balance was included in accrued salaries and related
liabilities on the balance sheet at June 30, 2001. The program is expected to
save $9,400 annually in salaries and benefits. Savings in salaries resulting
from the August 2000 reduction in work force plus helped to reduce the impact of
the recent plan implementation.
Rent and facility fees increased by $687, or 9% during the six months ended
June 30, 2001 compared to the same period ended in 2000. A 25% increase in real
estate taxes due to reduced abatements was one of the primary factors for this
increase. Light, heat and power costs also rose during the first six months of
2001, increasing by 35% when compared with the same period a year ago. This
trend is expected to continue during the third quarter of 2001, as utility rates
remain substantially higher than last year's rates.
Depreciation and amortization of property and equipment, net of deferred
credit amortization, increased by $1,098, or 17%, in the first half of 2001 when
compared to the same period during 2000. This increase, which is expected to
continue during the third quarter of 2001, is primarily the result of
management's decision to reduce the estimated useful life of an internally
developed software project from five years to three years during the fourth
quarter of 2000. This change in estimate is based on management's belief that
this software has a shorter useful life due to rapidly changing technology.
Telecommunications, equipment rentals and maintenance increased by $625, or
9%, during the six months ended June 30, 2001 compared to the year ago period.
Increased usage of NYMEX ACCESS(R) terminal lines, as a result of the improved
functionality of this trading system, was the primary cause of this increase. In
addition to increased efficiency due to improved design, more NYMEX ACCESS(R)
terminals were in service for the six months ended June 30, 2001 when compared
with the same period a year ago. This was the result of management's decision
made at the end of the first quarter of 2000 to move electricity trading from
open-outcry to NYMEX ACCESS(R).
Professional services decreased by $1,722, or 21% during the six months
ended June 30, 2001, compared with the same period a year ago. Costs related to
debugging and system programming changes on NYMEX Access(R) occurred throughout
2000, but were substantially completed by the first quarter of 2001. This was
the
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primary reason for the decrease during the six months ended June 30, 2001. This
trend is expected to continue throughout the rest of the year.
Impairment loss of $1,605 occurred during the six months ended June 30,
2001 as a result of an alleged breach of contract by a vendor that was producing
the customer interface to the enymex(SM) system which resulted in the
abandonment of that application.
Demutualization expenses incurred during the six months ended June 30, 2000
totaled $3,715, or 5% of the total operating expenses in 2000; such expenses did
not occur in 2001. These fees consisted of accounting, investment banking,
legal, printing and SEC filing fees.
Other expenses increased by $1,195, or 60% during the six months ended June
30, 2001 when compared with the same period a year ago. This is primarily the
result of the change in accounting presentation for the funding of, and earnings
on, the COMEX members' retention program. Prior to the demutualization in
November 2000, all earnings and contributions to this plan were presented as a
transfer from members' equity. This increase is expected to continue during the
third quarter of 2001.
The decrease in the Company's effective tax rate for the six month period
ended June 30, 2001, as compared to the six month period ended June 30, 2000, is
due to the Company's higher proportion of non-taxable earnings relative to
pre-tax loss.
The Company is exploring the potential tax benefit, if any, of the
termination distribution of $33,221 from the NYMEX Division Members' Retention
and Retirement Plan.
Other Income
Investment income, net of advisory fees, decreased by $1,419, or 33%,
during the first half of 2001 when compared to the same period in 2000. The
liquidation and distribution of funds from the NYMEX Division members' retention
plan during January of this year is the primary reason for the decrease in
investment income. A 100 basis point decline in the average interest rates on
reverse repurchase agreements also contributed to this decrease. This trend is
expected to continue in the third quarter as interest rates are considerably
lower this year when compared with last year.
FINANCIAL CONDITION AND CASH FLOWS
Liquidity and Capital Resources
The Company has made, and expects to continue to make, significant
investments in technology to fund its future growth and increase shareholder
value. A total of $6,279 was spent on capital expenditures during the second
quarter of 2001 as the Company continued to develop its enymex(SM) initiative.
The Company had $77,580 in cash, cash equivalents and marketable securities at
June 30, 2001.
Cash Flow
(IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30,
---------------------
2001 2000
-------- -------
Net cash provided by (used in):
Operating activities.............................. $ 29,283 $(2,764)
Investing activities.............................. (11,690) (5,467)
Financing activities.............................. (33,221) (556)
-------- -------
Net decrease in cash and cash equivalents........... $(15,628) $(8,787)
======== =======
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Working Capital
(IN THOUSANDS)
AT JUNE 30, AT DECEMBER 31,
2001 2000
----------- ---------------
Current assets..................................... $101,010 $131,166
Current liabilities................................ 29,718 56,274
-------- --------
Working capital.................................... $ 71,292 $ 74,892
======== ========
Current ratio...................................... 3.40:1 2.33:1
Current assets at June 30, 2001 decreased by $30,156, or 23%, from year-end
2000 primarily as a result of the liquidation and distribution of the NYMEX
Division members' retention plan in January 2001. This payment caused marketable
securities to decrease by $17,399, with the remaining $15,283 coming from cash
balances. The other significant changes in current assets consisted of an
increase of $1,051 in clearing and transaction fees receivable as a result of
increased trading activity in June 2001 when compared with the year-end 2000
receivable. Prepaid taxes also increased $2,115 as a result of tax benefits
generated from this year's six-month net loss.
Current liabilities at June 30, 2001 decreased by $26,556, or 47%, from
year-end 2000, primarily as a result of the January distribution of the members'
retention plan, which was $33,221. Increases in accrued salaries and related
liabilities of $3,370 was the result of both the six-month portion of
anticipated year-end employee bonuses as well as the unpaid severance balance at
June 30, 2001 resulting from the June 2001 reduction in work force plan.
Accounts payable and accrued liabilities increased by $2,335, or 21%, as
significant capital expenditures occurring in June 2001 for enymex(SM) had not
yet been paid.
Future Cash Requirements
As of June 30, 2001, the Company had long-term debt of $97,185, and
short-term debt of $2,815. This debt consisted of the following:
- $31,000 of 7.48% notes with an eleven-year principal payout beginning in
2001;
- $54,000 of 7.75% notes with an eleven-year principal payout beginning in
2011; and
- $15,000 of 7.84% notes with a five-year principal payout beginning in
2022.
The Company would incur a "make whole" redemption premium should it choose
to pay off any series issue prior to its maturity. The economic benefit from
refinancing at a lower interest rate would be offset by the redemption penalty
incurred. These notes contain certain limitations on the Company's ability to
incur additional indebtedness.
The Company believes that its cash flows from operations will be sufficient
to meet its needs for the foreseeable future, including capital and operating
expenditures associated with the development and launch of enymex(SM). In
addition, the Company has the ability, and may seek, to raise capital through
the issuance of debt or equity in the private and public capital markets.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which was later amended by SFAS No. 138.
Among other provisions, it requires that entities recognize all derivatives as
either assets or liabilities in the balance sheet and measure those instruments
at fair value. Gains and losses resulting from changes in the fair values of
those derivatives would be accounted for depending on the use of the derivative
and whether it qualifies for hedge accounting treatment. The effective date of
this standard was delayed via the issuance of SFAS No. 137. The effective date
of SFAS No. 133 is now for fiscal years beginning after June 15, 2000, though
earlier adoption is encouraged and retroactive application is prohibited.
Effective January 1, 2001, the Company adopted this statement. Upon adoption,
SFAS No. 133 had no impact on the Company's financial position or results of
operations.
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In September 2000, FASB issued SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities -- a
Replacement of FASB Statement No. 125, which revises the standards of accounting
for securitizations and other transfers of financial assets and collateral. The
provisions of SFAS No. 140 carry over most of the guidance outlined in SFAS No.
125 and further establish accounting and reporting standards with a
financial-components approach that focuses on control. Under this approach,
financial assets or liabilities are recognized when control is established and
derecognized when control has been surrendered or the liability has been
extinguished. In addition, specific implementation guidelines have been
established to further distinguish transfers of financial assets that are sales
from transfers that are secured borrowings. SFAS No. 140 is effective
prospectively for transfers occurring after March 31, 2001 and for disclosures
relating to securitization transactions and collateral for fiscal years ended
after December 15, 2000. The Company adopted the provisions of SFAS No. 140 that
relate to disclosures of securitization transactions and collateral in the
preparation of its condensed consolidated financial statements for the quarter
ended March 31, 2001. The Company adopted the remaining provisions of SFAS No.
140 as required, during the second quarter of 2001. The adoption of the
remaining provisions had no impact on the Company's financial position or
results of operations.
In June 2001, FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets, which supercedes APB Opinion No. 17, Intangible Assets. This statement,
effective for fiscal years beginning after December 15, 2001, addresses, among
other things, how goodwill and other intangible assets should be accounted for
after they have been initially recognized in the financial statements. The
provisions of SFAS No. 142 provide for an impairment test to be performed at
least annually rather than monthly amortization. The Company believes that the
adoption of SFAS No. 142 will have a material effect on operations. If the
Company had adopted this standard during the second quarter of 2001, the net
loss would have decreased by $538,000, or $659 per share. The Company believes
that the adoption of this standard may increase annual pre-tax net income by
$2,152,000 or $2,637 per share, which is the amount of annual amortization of
goodwill.
RECENT DEVELOPMENTS
enymex(SM) is the Company's e-commerce initiative, which the Company
believes will become the premiere global internet-based electronic exchange for
trading and clearing a number of physical commodity-based products. The Company
has an agreement with Kiodex, Inc., an application service provider of commodity
and derivatives risk management solutions, to use its trade engine platform as
the order matching system for enymex(SM). In March 2001, integration system
testing commenced; however, in April 2001, the Company terminated its
relationship with GlobalView Software, Inc., the developer of the customer
interface, due to performance issues under its contract and subsequently filed a
breach of contract suit. To mitigate the impact on the effected interface, the
Company has determined to proceed in the co-development of the customer
interface with Kiodex, and the Company expects to announce a launch date for the
system in the third quarter of 2001. In addition, in May 2001, the Company
transferred the responsibilities of Accenture, retained in 2000 as a systems
integrator, to internal company resources.
The Company is in the process of developing a new version of NYMEX
ACCESS(R), the Company's existing electronic trading system used primarily for
after-hours trading. This new version will provide for an internet accessible
trade matching system. The Company believes that the development of this new
version will reduce the logistical constraints associated with the existing
version of the system that runs through a dedicated line or dial-up basis. The
Company is in the process of alpha testing the new version of the system and
expects to release it in September 2001, pending the results of the beta
testing.
On April 11, 2001, the Company announced that it intended to develop Brent
crude oil futures and options contracts. On April 17, 2001, the Company
announced that all clearing and exchange fees for the first year of trading will
be waived for Brent futures and options and that the Company will offer rebates
on offsetting light, sweet crude oil futures contracts for a three month period.
On July 2, 2001, the Board of Directors voted to commence trading of Brent crude
oil futures contracts on September 5, 2001, and also approved both trading hours
and a framework for a permit program. The contract will be traded both via open-
outcry and after-hours on the NYMEX ACCESS(R) electronic trading system. Options
trading will commence on September 6, 2001.
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A special meeting of NYMEX Holdings' stockholders was held on May 23, 2001
to vote for three new equity holder positions and to fill two current vacancies
on the Board of Directors. The stockholders elected the following individuals:
Michel Marks, Joel Faber and Joseph Cicchetti were elected to newly created
positions as equity holder representatives; John McNamara was elected to fill a
vacancy for a two-year term in the futures commission merchant category and
Melvyn Falis was elected to fill a vacancy for a one-year term as a public
director.
On July 12, 2001, the Board of Directors voted not to renew Deloitte &
Touche LLP ("D&T") as the Company's independent accountants. On July 12, 2001,
the Company engaged the accounting firm Ernst & Young LLP ("E&Y") as the
Company's independent accountants.
On July 12, 2001, the Board of Directors voted to appoint J. Robert Collins
Jr. as President of NYMEX Holdings and NYMEX Exchange. Mr. Collins assumed the
position of President on July 23, 2001. Upon becoming President, Mr. Collins
vacated his Board seat.
RESPONSIBILITY FOR FINANCIAL REPORTING
Management is responsible for the preparation, integrity and objectivity of
the unaudited condensed consolidated financial statements and related notes, and
the other financial information contained in this quarterly report. Such
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America and are considered by
management to present fairly the Company's financial position, results of
operations and cash flows. These unaudited condensed consolidated financial
statements include some amounts that are based on management's best estimates
and judgements, giving due consideration to materiality.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The table below provides information about the Company's marketable
securities, excluding equity securities, including expected principal cash flows
for the years 2001 through 2006 and thereafter (in thousands).
PRINCIPAL AMOUNTS BY EXPECTED MATURITY
AT JUNE 30, 2001
TOTAL FAIR MARKET
2006 PRINCIPAL VALUE AS OF
AND CASH JUNE 30,
2001 2002 2003 2004 2005 THEREAFTER FLOWS 2001
------ ------ ------ ------ ------ ---------- --------- -------------
Government Bonds, Federal Agency
Issues.............................. $ -- $ -- $ -- $ -- $ 952 $ -- $ 952 $ 951
Weighted average interest rate........ -- -- -- -- 7.00% --
U.S. Treasury issues.................. -- -- -- -- -- -- -- --
Weighted average interest rate........ -- -- -- -- -- --
Municipal Bonds....................... 595 2,773 2,775 7,876 6,092 32,357 52,468 55,069
Weighted average interest rate........ 4.93% 6.28% 4.73% 4.84% 4.70% 4.61%
------ ------ ------ ------ ------ ------- ------- -------
Total Portfolio, excluding equity
securities.......................... $ 595 $2,773 $2,775 $7,876 $7,044 $32,357 $53,420 $56,020
====== ====== ====== ====== ====== ======= ======= =======
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PRINCIPAL AMOUNTS BY EXPECTED MATURITY
AT DECEMBER 31, 2000
TOTAL FAIR MARKET
2006 PRINCIPAL VALUE AS OF
AND CASH DECEMBER 31,
2001 2002 2003 2004 2005 THEREAFTER FLOWS 2000
------ ------ ------ ------ ------ ---------- --------- ------------
Government Bonds, Federal Agency
Issues.............................. $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
Weighted average interest rate........ -- -- -- -- -- --
U.S. Treasury issues.................. -- -- -- -- -- -- -- --
Weighted average interest rate........ -- -- -- -- -- --
Municipal Bonds....................... 2,633 3,777 1,133 3,397 9,785 49,914 70,639 73,037
Weighted average interest rate........ 6.19% 5.86% 4.62% 5.02% 5.07% 4.77%
------ ------ ------ ------ ------ ------- ------- -------
Total Portfolio, excluding equity
securities.......................... $2,633 $3,777 $1,133 $3,397 $9,785 $49,914 $70,639 $73,037
====== ====== ====== ====== ====== ======= ======= =======
INTEREST RATE RISK
Current Assets. In the normal course of business, the Company invests
primarily in fixed income securities. Marketable securities bought by the
Company are typically held for the purpose of selling them in the near term and
are classified as trading securities. Unrealized gains and losses are included
in earnings. For the six months ended June 30, 2001 and the year ended December
31, 2000, the Company had net investment income of $2.9 million and $9.4
million, respectively. Accordingly, a substantial portion of the Company's
income depends upon its ability to continue to invest monies in these
instruments at prevailing interest rates and market prices. The fair value of
these fixed income securities at June 30, 2001 and December 31, 2000 was $56
million and $73 million, respectively. The change in fair value, using a
hypothetical 10% decline in prices, is estimated to be a $5.6 million and $7.3
million loss for June 30, 2001 and December 31, 2000, respectively. The Company
also invests in U.S. government securities and repurchase agreements and
maintains interest-bearing balances in its trading accounts with its investment
managers. Financial instruments with maturities of three months or less when
purchased are classified as cash equivalents in the consolidated financial
statements.
Debt. The interest rate on the Company's long-term indebtedness is a
weighted average fixed rate of 7.68%. The Company's fixed rate debt is exposed
to the risk that the fair market value of its debt will increase in a declining
interest rate environment. This would result in the Company paying a redemption
premium if it should choose to refinance this debt. Management has not deemed it
necessary to employ any market or interest risk management strategies, such as
interest rate swap agreements. In the future, as the Company pursues its market
strategy, it may become subject to a higher degree of interest rate sensitivity
if it is required to borrow at higher or at variable rates. This could
significantly increase the Company's future sensitivity to interest rate
fluctuations and materially affect, in a negative manner, the Company's future
financial position and results of operations. There have been no material
changes in the Company's outstanding debt since December 31, 2000.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
New York Mercantile Exchange v. GlobalView Software, Inc. On April 27,
2001, NYMEX Exchange filed a breach of contract suit in New York State Supreme
Court (New York County). NYMEX Exchange seeks to recover direct and
consequential damages resulting from GlobalView's breach of its contract with
NYMEX Exchange regarding the front-end development for enymex(SM). On or about
June 18, 2001, GlobalView served its answer and counterclaims in which it seeks
to recover amounts in excess of $26,000,000 for alleged fees due and owing under
the contract, as well as consequential damages and other causes of action. On
June 28, 2001, NYMEX Exchange served an amended complaint on GlobalView. On
about July 24, 2001, GlobalView filed a motion to dismiss one cause of action in
the amended complaint.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
N/A
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
N/A
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A special meeting of NYMEX Holdings' stockholders was held on May 23, 2001
to vote for three new equity holder positions and to fill two current vacancies
on the Board of Directors. The following individuals were elected: Michel Marks,
Joel Faber and Joseph Cicchetti were elected to newly created positions as
equity holder representatives; John McNamara was elected to fill a vacancy for a
two-year term in the futures commission merchant category and Melvyn Falis was
elected to fill a vacancy for a one-year term as a public director.
ITEM 5. OTHER INFORMATION
N/A
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
On July 18, 2001, NYMEX Holdings filed a Form 8-K with the SEC disclosing
the change in auditors from Deloitte & Touche LLP to Ernst & Young LLP and the
appointment of J. Robert Collins, Jr. as President. The letter regarding the
change in certifying accountants is hereby incorporated by reference as Exhibit
16.1 of such Form 8-K.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on the 13th day of August, 2001.
NYMEX HOLDINGS, INC.
By: /s/ PATRICK F. CONROY
------------------------------------
Name: Patrick F. Conroy
Title: Duly Authorized Officer and
Principal Financial Officer
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